Are there any “Widow and Orphan” Stocks these days?
Nov 2, 2006
In an interesting focus group discussion with a group of corporate bankruptcy lawyers we were made aware of an interesting term, a "widow and orphan" stock.
Were stocks ever meant for widows and orphans? Shouldn't the average, middle class widows save their money in banks and under mattresses for their old age? In the 1930s, of all times, apparently this wasn't the thinking. It was believed that there were certain stocks of mature companies which were stable and had low risk - well, Enron was still a good 70 years away - and paid high dividend which were indeed suitable for widows and orphans (if orphans had any money in the 1930s). Hence the term, a "widow and orphan" stock was coined in America during the depression era.
Which stock or group of stocks qualifies for being a "widow and orphan" stock? In those days, apparently public utility stocks in America (prior to deregulation) fell into this category (we looked it up in the internet). How about today? Oh boy, that would be the question of the century. We don't know, but this much is certain that widows have definitely become smarter than other category of investors.
Apparently - and we did not know this until recently - there is traditionally a clause in many convertible bond documents known as "orphan and widow" clause which more or less forces the bondholder to convert the bonds into shares when the embedded equity call option is deep in the money.
Reference : See the web for references on the above as well as Richard Bruyere, et al in Credit Derivatives .
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